With the S&P 500 pushing to the 1,525 target – a new recovery high – what do Market Internals say about the health of the rally that price doesn’t reveal alone?

Let’s pull back the hood of the market to assess an interesting pattern forming in Market Internals:

The chart above shows the S&P 500 Index on the 30-min chart with Breadth ($ADD) and VOLD ($VOLD) to represent the difference in advancing and declining issues (NYSE).

The NYSE Internals give a broader perspective, though I’ve included an SP500 specific Breadth chart below for clearer reference.

What we see is not technically a pure divergence, but a compression in Internals.

Yes, price made higher highs on steadily decreasing highs in both Breadth and VOLD for a classic negative divergence, but Breadth and VOLD lows ALSO compressed toward the zero line resulting in a compression.

Typically, price tends to eject or break out into an impulse move when we see this type of compression pattern so we’ll be on guard for any sort of range breakout or expansion phase from the low-volatility ‘creep’ we’ve been seeing.

We can get a clearer perspective by viewing SP500-specific internals:

The S&P 500 Advancing minus Declining issues – not surprisingly – also shows the triangle compression pattern that corresponding with the recent push to new recovery highs.

In numerical terms, the most recent high in internals was on February 5th with a session-high reading of 410 while the S&P traded at 1,514.

Today’s new SP500 recovery high near 1,525 registered a simultaneous Breadth high of ‘only’ 230 stocks.

At that moment of the new recovery high, roughly 361 stocks were positive on the session and roughly 139 stocks were negative on the session.

That’s not the shining example of bullish strength that was exhibited earlier with clearly higher Breadth readings while the SP500 traded at lower levels.

It’s a warning or caution sign to be sure, and bears will take it as a short-sale non-confirmation signal it will add to the growing chorus of bearish evidence that suggests a reversal or at least a minimal retracement is due.

As a point of reference, the most recent visual negative divergence occurred on January 29th where I drew the highlighted region.

The lengthy negative divergence preceded only a small retracement, though price did correct sideways instead of continuing its trend without a pause.

Continue watching price relative to current levels and be on guard for any sort of breakout or clear directional movement in Internals out of the current compression triangle pattern.